Dual Pricing in a Model of Sales

Abstract

Dual pricing is a vertical restraint whereby a manufacturer charges a distributor a different price for units intended to be resold online than for units intended to be resold offline. We study the competitive effects of dual pricing in a clearinghouse model, in which a manufacturer contracts with hybrid retailers, which sell the manufacturer's product not only in their brick-and-mortar stores but also on an online channel. We find that dual pricing is an essential tool for the manufacturer, in the sense that this vertical restraint allows it to fully exert its monopoly power---whereas uniform pricing does not. This does not necessarily mean, however, that this practice harms consumers and society at large, as the market outcome is distorted by market power regardless of whether dual or uniform pricing is used. In fact, we find that consumer surplus and aggregate surplus are higher under dual pricing if the online market is sufficiently small or if the search costs faced by offline consumers are sufficiently high. (joint with N. Schutz)